Companies who own the rights to successful restaurants sell the name, branding, business modes, and products to third-party investors. The franchisor (usually a parent company), supports individual investors (otherwise known as ranchisees), who work to open and operate a franchise restaurant. Both parties enter into an agreement that includes monthly fees, usually in the form of a percentage of gross monthly sales.
What does it take to open a franchise restaurant?
Opening a franchise may seem simpler than building a brand from the ground up. But it still requires franchise costs and start-up fees, and some franchisors require investors to have a minimum net worth.
Costs include purchasing the rights to copyrighted restaurant names, branding, and products. Most of the time, franchise restaurants are required to sell the same products as the other stores in the franchise.
Start-up fees refer to the initial costs of opening a franchise restaurant. Potential line items include building or renting a space for the restaurant, purchasing paper and plastic products, hiring and training a crew, and advertising your opening.
Because of start-up costs and the ongoing financial responsibilities of running a restaurant, some franchisors require that investors prove they have a minimum net worth or liquid assets. They want to be sure that you have the funds necessary to get the restaurant up and running and stay up and running.
Franchisors and franchisees enter an agreement in which the franchisee agrees to pay the parent company monthly fees—usually a portion of their gross monthly sales—in exchange for continued use of the branding, advertising, and products developed by the franchisor. Franchisors also often provide restaurants with business support, to ensure that franchised stores succeed.
Part of that agreement outlines whether or not the franchisee will be buying or leasing a store. Leasing can be cheaper up front but includes higher monthly fees, whereas owning a store generally incurs lower monthly fees—but is unquestionably expensive up front.
Let's take a look at all of the financial costs that go into opening a restaurant.
Franchise Restaurant Costs
Total initial expenses can range anywhere from $10,000 to $1.3 million in franchise and start-up costs, while monthly fees can amount to 2% to 50% of gross monthly sales. Both seem like big ranges, but franchise agreements all work differently. Even among the top franchise restaurants, costs, fees, and start-up expenses vary greatly.
Chick-fil-a has relatively low franchise costs of $10,000, and provides everything franchisees need to open a store. That said, franchisees are expected to know how to run a business already, and are given little support toward success. Monthly fees also equal a whopping 50% of gross sales for leased restaurants, and 15% for restaurant owners.
On the opposite end of the spectrum, Taco Bell’s franchise cost is $45,000, and can climb up to $2.6 million to open after start-up fees. Franchisees agree to a 5.5% monthly fee, and an additional 4.25% of gross sales for marketing fees.
Ins and outs of restaurant franchise opportunities
The support in starting a new restaurant, especially for those without experience in the market, can be invaluable to new franchisees.
Franchisees purchase access to a proven business model, that likely already has brand recognition. Even if you bring a new franchise to an area, the brand is likely identifiable thanks to the regional or national marketing campaigns run by the parent company.
Often, franchisees can invest in multiple brands under a parent company, which allows them to see higher profits and negotiate agreements with lower monthly costs.
Some franchise restaurants offer employees benefits, help with tuition, and have competitive pay scales. Others have restrictive pay scales that can make it hard to compete for quality employees, and hamstring a franchisee’s ability to reward good performances.
Franchise restaurants, like all restaurants, are a high-risk investment, and are susceptible to fluctuations in the economy. Restrictive franchise agreements and profit sharing can make it difficult for franchisees to combat economic crises with creativity and flexibility.
In short, the support, branding, and advertisement provided by franchisors can make running a franchise an attractive investment. But certain restrictions can be discouraging, not to mention costs, profit sharing, and monthly fees.
Best Restaurant Franchises
As an investor, potential profitability is key. Where a restaurant is located often determines its success, but certain brands and business models are built to thrive in any market.
Compiled from sources across the web, these are the top ten restaurant franchises:
Restaurant Opening Calculator
This calculator lays out some of the fundamental financial costs of opening a restaurant, so you can start planning and bring your dream restaurant to life.